What Affects Your Credit Scores?
Feel like you need an advanced degree to find out what's affecting your credit score? The good news is that it doesn't; actually, it can be quite simple.
Behind the number itself (credit scores typically range from 300 to 850), there are five main factors used to calculate credit scores. Lenders use these scores to calculate the probability that you will repay your debt; therefore, those scores are often the deciding factor in obtaining a new loan.
As your financial profile changes, so does your score, so knowing what factors and types of accounts affect your credit score gives you the opportunity to improve it over time.
Top 5 Credit Score Factors
While the exact criteria used by each rating model vary, these are the most common factors that affect your credit scores.
Payment history
Payment history is the most important ingredient in your credit score, and even a missed payment can have a negative impact on your score. Lenders want to be sure that you will pay your debt on time when considering your new credit. Payment history represents 35% of your FICO ® Score ☉, the credit score used by 90% of the major lenders.
Amounts owed
Your credit use, particularly represented by your credit utilization ratio, is the next most important factor in your credit scores. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at the amount of available credit you are using and can give you an idea of how dependent you are on non-cash funds. Using more than 30% of your available credit is bad for creditors. Credit utilization represents 30% of your FICO ® Score.
Length of credit history
The length of time you have had credit accounts represents 15% of your FICO ® Score. This includes the age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
Credit mix
People with high credit scores often have a diverse portfolio of credit accounts, which can include a car loan, credit card, student loan, mortgage, or other credit products. Credit scoring models consider account types and how many of each you have as an indication of how well you manage a wide range of credit products. The credit mix represents 10% of your FICO ® Score.
New credit
The number of credit accounts you have recently opened, as well as the number of rigorous inquiries lenders ask when applying for credit, represents 10% of your FICO ® Score. Too many accounts or inquiries can indicate increased risk and as such can damage your credit score.
How does having different accounts affect my credit score?
Credit mix, or the diversity of your credit accounts, is one of the most common factors used to calculate your credit scores. It is also one of the most forgotten by consumers. Keeping different types of credit accounts, such as a mortgage, personal loan, and credit card, shows lenders that you can manage different types of debt at the same time. It also helps them get a clearer picture of their finances and their ability to pay their debts.
While having a less diverse credit portfolio won't necessarily lower your scores, the more types of credit you have, as long as you make payments on time, the better. The combination of credits represents 10% of your FICO ® Score and could be an influencing factor in helping you achieve a maximum score.